Addressing threats to health care's core values, especially those stemming from concentration and abuse of power. Advocating for accountability, integrity, transparency, honesty and ethics in leadership and governance of health care.

Thursday, November 06, 2014

What Big Drug and Biotechnology Companies Will Not Tell Us - Transparency International on Corporate Reporting

Drug companies are entrusted to provide pure, unadulterated medicines. Increasingly drug companies are now entrusted with doing research, including experimental studies, on human beings, and providing education to doctors and patients. Ordinarily, trust requires confidence in transparency. However, a new report suggests that large multinational drug and biotechnology companies are not very transparent.

Transparency International just released a report on the transparency, or lack thereof, of the 124 biggest multinational corporations. The report detailed how well these companies disclosed their internal anti-corruption programs, their subsidiaries, affiliates, and joint ventures, and their financial data broken down by the countries in which they operate. In summary, the overall results for disclosing anti-corruption programs were mediocre, and for disclosing organizational structure and country-by-country financial data, they were dismal.

The report has so far received little media coverage. In the US, several news services provided brief summaries. Somewhat more substantial articles came from Reuters, the Wall Street Journal's Risk and Compliance Journal, and CNBC. None gave specifics about health care. Coverage from other countries, e.g., Germany by Deutsche Welle, and the UK by the Guardian, was more detailed but also did not specifically mention health care.

Therefore, I will summarize the rationale and assessment methods used by Transparency International for its three dimensions of transparency, and then show results from the 13 health care corporations.

Disclosure of Anti-Corruption Programs

The rationale for addressing this area was:

Global companies have legal and ethical obligations to conduct their business honestly. This requires
commitment, resources and the ongoing management of a range of risks – legal, political and reputational – including those associated with corruption. The implementation of a comprehensive range of anticorruption policies and management systems is fundamental to efforts to prevent and remediate corruption within organisations.

Transparency International believes that public reporting by companies on their anti-corruption programmes allows for increased monitoring by stakeholders and the public at large, thereby making companies more accountable

Evaluation of disclosure of anti-corruption programs was

based on 13 questions, which are derived from the UN Global Compact and Transparency International Reporting Guidance on the 10th Principle against Corruption. This tool, based on the Business Principles for Countering Bribery, which were developed by Transparency International in collaboration with a multi-stakeholder group, includes recommendations for companies on how to publicly report on their anticorruption programmes.

Note that the project addressed only reporting of anti-corruption programs, not their implementation or effectiveness.

For this and the other two dimensions of transparency, responses were converted into a 0% to 100% scale, with 100% being the best possible result.

Organizational Transparency

The rationale was:

As many of the recent corporate scandals have shown, acts of corruption are very often aided by the use of opaque company structures and secrecy jurisdictions. But the use of offshore companies and their lack of transparency are posing increasing risks for global companies as well as for their shareholders, employees and local communities.

So,

Companies can mitigate the risks posed by lack of transparency and ownership arrangements by shedding more light on their corporate structures and by making basic financial information public on a country-by-country basis. This allows stakeholders to have a clearer understanding of the extent of a company’s operations and makes the company more accountable for its activities in a given country, including assessing whether it contributes financially in a manner appropriate to its level of activity.

The measurement strategy was,

Transparency International researchers consulted publicly available documents such as annual reports and stock exchange filings for information about company subsidiaries, affiliates, joint ventures and other holdings. The information sought included corporate names, percentages of ownership by the parent company, countries of incorporation and the countries in which the companies operate.

Country-by-Country Reporting

The rationale included:

The importance of country-by-country reporting was first recognised in the extractive sector as a way to ensure that revenues from natural resources are used to foster economic and social development rather than line the pockets of kleptocratic elites.

So,

country-by-country reporting ... [is] a recognised building block for corporate transparency and as a tool for countering tax avoidance.

In addition, country-by-country reporting provides investors with more comprehensive financial information about companies and helps them address investment risk more effectively.

The items measured were disclosure of revenue/sales, capital expenditures, pre-tax income, income tax, and community contribution in each country in which the company operated.

Again, only one company, GlaxoSmithKline, achieved an overall score of barely better than 50%. All the others had lower scores. Only two companies achieved a 50% score on disclosure of organizational structure, and only one achieved a score of better than 10% for disclosing country-by-country results. The Transparency International report noted that the health care companies got particularly bad scores for disclosing organizational structure, averaging 31%, the third worst performance by economic sector.

Summary

The drug and biotechnology companies generally did a fairly good job
disclosing what their anti-corruption programs were supposed to do.
However, note that the Transparency International report did not assess
how well these programs were implemented or enforced. That this concern
is not academic is underscored by some of these companies disreputable
track records. Some have long histories of legal actions, including
billion dollar plus legal settlements, some of which were of allegations
of fraud or kickbacks, and some have been convicted of crimes. See the
records of, for example: Abbott Laboratories (look here and here), Amgen (here), AstraZeneca (here), GlaxoSmithKline (here), Johnson and Johnson (here), Merck (here), Novartis (here), Novo Nordisk (here), Pfizer (here), Roche (here), Sanofi (here), and Teva (here).

Moreover,
the companies did not do a good job disclosing their organizational
structures, and hardly any bothered to report any financial results
broken down by country.

We have frequently discussed health care corporations' deceptivemarketing, induction of conflicts of interest, including those of supposed "key opinion leaders" who often are marketers in academic or professional clothing, and manipulation and suppression of clinical research. There has been an ongoing procession of legal settlements involving health care corporations, often involving allegations of, and sometimes convictions for fraud, kickbacks, bribery, or other crimes. There have even been some cases in which drug companies have failed to assure that their products are pure and unadulterated, their most basic mission. Thus many are distrustful of drug and biotechnology companies, and large health care organizations in general.

So, as Transparency International's report noted, to rebuild trust,

integrity must be central to these efforts. Those efforts, in turn, can only become fully credible if they are undertaken with a sustained commitment to ethical behaviour and transparency across companies’ operations.

In my humble opinion, a basic premise of true health care reform would be that health care organizations become sufficiently transparent to restore basic trust in them.

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